Gold Price: USD 65,000/oz in 5 years?

Financial market prices are generally set by the trading venues which command the highest trading volumes and liquidity. This is also true of the gold market where the venues with the highest gold trading volumes - the London over-the-counter and COMEX gold futures markets – establish the international gold price.

However, these two gold markets merely trade paper gold claims in the form of unallocated gold positions (London Gold Market) and gold futures derivatives (COMEX). This trading creates paper gold supply out of thin air and is also highly leveraged and fractional in nature since the paper gold claims are only fractionally backed by real physical gold.

Although these highly leveraged synthetic gold trades have nothing to do with the transacting of physical gold, perversely they still establish the international gold price because physical gold markets merely inherit the gold prices derived in these ‘high liquidity’ paper gold markets.

BullionStar maintains that these paper gold markets cannot price physical gold accurately because they don’t trade physical gold, instead they trade infinitely scalable fractional claims on a smaller amount of physical gold. The international gold price is thus an artificial gold price totally removed from supply and demand in the physical gold markets.

Drawbacks of paper gold / Benefits of physical gold

Each trading day in the London OTC gold market, the equivalent of a staggering 6500 tonnes of gold is traded.

To put this into perspective, less than 7500 tonnes of physical gold vaulted in the entire London gold vaulting network, most of which is owned by central banks and Exchange Traded Funds.

Nearly all trading in the London OTC gold market is speculate activity based on unallocated gold positions. Unallocated gold positions are just book-keeping entries where the holder of the position is an unsecured creditor to a counterparty bullion bank, and the position just represents indebtedness between the two transacting parties.

Likewise, on the COMEX futures exchange during 2017, only 1 in every 2650 gold futures contracts actually reached delivery via a transfer of underlying gold. The remainder (99.96%) of gold futures are cash-settled. There is very little physical gold backing COMEX gold trading i.e. Registered physical gold inventories in COMEX approved gold vaults represent only a tiny fraction of the total volume of gold futures traded at any given time.

Conversely, real physical gold is a tangible asset that exists in limited quantities, it is inherently valuable, difficult to produce, difficult to counterfeit, and most importantly when held in the form of fully allocated, segregated and unencumbered gold bars and gold coins, it has no counterparty risk and so is no one else’s liability.

Real physical gold is not a claim on gold. It is gold. Real physical gold is real money, and is the ultimate form of saving and store of value due to its ability to retain its purchasing power over time. Unfortunately, the proliferation of paper gold trading dwarfs the volume of physical gold traded, and thus the gold price is set on these huge paper gold trading volumes.

Price Disconnect

But given the dominance of gold pricing by the paper gold markets, can this situation continue, and if so for how long?

BullionStar would contend that this situation can only continue while the bulk of paper gold market participants are happy to continue trading paper gold claims and in the absence of a shock to the physical gold demand-supply balance.

Conversely, a shift in the trading behaviour of paper gold traders away from paper gold towards physical gold, or a scenario in which physical gold demand overwhelms available physical gold supply, could cause a disconnect between gold pricing in the paper gold and physical gold markets, with the paper price falling while the physical price simultaneously rises.

Physical Gold flows West to East

As Western institutional and retail investors continue to speculate and trade staggering volumes of paper gold instruments, Eastern buyers in Asia continue to accumulate real physical gold, physical gold which is in limited supply.

These flows of physical gold from West to East have been ongoing for some time and can even be viewed as a slow and silent bank run on the physical gold market.

Classic commercial bank runs either begin when a subset of a bank’s customers suspect that the bank may not have sufficient liquid cash to repay all depositors, or else suspect that the bank’s loan base has soured. Since commercial banks employ fractional reserve banking where only a fraction of depositors’ money is kept in reserve (the majority being lent out in the form of loans), depositors with early suspicions begin withdrawing their money first.

Word spreads that the bank is having trouble meeting withdrawal requests and more and more depositors follow suit attempting to make withdrawals. Panic soon sets in with the bank forced to limit withdrawals and request emergency assistance from regulators.

The same end-game could be said to be true of fractional-reserve gold banking where holders of claims on physical gold rush to be the first to convert their claims into physical gold. Since the early 2000s, there has been a continual and substantial flow of physical gold from West to East. For example, since 2001, India has net imported over 11,000 tonnes of gold. This imported gold has for the most part stayed within India.

Likewise, since 2001, China has imported over 7,000 tonnes of gold. Because exports of gold are prohibited from the Chinese gold market, this gold cannot leave China mainland. In addition, the Chinese central bank has reported a 1400 tonne increase in its gold holdings since 2001. This is gold that the People"s Bank of China buys exclusively on international gold markets in the form of wholesale gold bars and imports secretively into China, and is above and beyond reported Chinese gold import figures.

In the global gold market, Eastern buyers of physical gold are analogous to the early depositors of a commercial bank withdrawing their cash. In this scenario, a gold market ‘depositor shock’ prompting further withdrawals from the global stock of gold would be analogous to a widespread realization that the outstanding set of traded gold claims is far larger than the dwindling quantity of physical gold backing those claims. This realization would prompt further rotation out of paper gold into physical gold.

If at the margin, paper gold market players (later adopters) begin converting their paper gold claims into physical gold, or more realistically cash settle their paper claims and then try to use the proceeds to buy physical gold, this could set the scene for a disconnect between physical gold prices and paper gold prices.

On the one hand, a shift towards physical gold would overwhelm available physical gold supply, a situation which could only be rectified via an increase in the physical gold price to induce supply from existing above ground stocks. On the other hand, selling pressure in the paper gold markets to release proceeds to convert into physical gold would drive the paper gold price lower, thus also reinforcing this gold price disconnect.

Gold Price $65,000 +

But what would the real price of physical gold be in the absence of the subduing influence of the fractional and limitless paper gold market, or how do we even approach calculating a range of such physical gold prices?

Throughout history, gold has been the ultimate money and ultimate store of value. Until 1971, physical gold backed the international monetary system. Throughout monetary history and up until the latter half of the 20th century, gold played a critical role in backing paper currencies and in backing monetary debt. It is thus still appropriate to analyse the value of gold in relation to the value of currencies and the value of outstanding debt.

Approximately 190,000 metric tonnes of gold have been mined throughout history. Nearly all of this gold can still be accounted for in one form or another and is known as "above-ground gold". About 90,000 tonnes of this gold is held in the form of jewellery, 33,000 tonnes of gold are (supposedly) held by central banks, 40,000 tonnes are attributed to private gold holders, with the remainder having been used in industrial and other fabrication uses.

While 190,000 tonnes may sound like a lot, at the current gold price of USD 1250 per ounce, all the gold ever mined in the world is valued at less than $8 trillion, and official central bank gold holdings (monetary gold) are valued at just $1.3 trillion. The US Treasury claims to hold 8133 tonnes (or 261.5 million troy ounces) in its official gold reserves (a figure which, by the way, could be far lower since it has never been independently audited). At the current gold price, these US Treasury gold reserves are worth just under $320 billion.

Compare these gold valuations to total outstanding money supply figures. The total broad US money supply is currently running in excess of $18 trillion (using a "continuation M3" measure).  For the US money supply of $18 trillion to be fully backed by the US Treasury’s gold, this would require a gold price of $68,840 per troy ounce.

Even at a 40% gold-backing, a backing which was historically in place for the US money supply in a recent period in US monetary history, this would imply a gold price of $27,500 per ounce.

Gold Holdings, Money Supply, Global Debt, and Implied Gold Prices

Beyond the US money supply, total world money supply is currently running at over $85 trillion [source: broad money supply CIA World Factbook]. This global money supply of $85 trillion is approximately 11 times more than the current "valuation" of all the gold ever mined.

For the world’s money supply to be fully backed by total worldwide central bank gold holdings [33,000 tonnes] would require a gold price of $82,600 per troy ounce. Even if world money supply was 100% backed by all the gold ever mined, this would require a gold price of $13,900 per ounce.

According to a recent study by the high-profile consultancy McKinsey, the world’s total outstanding debt is currently $200 trillion (of which government debt is $58 trillion). For the total outstanding stock of global debt to be backed by all the gold ever mined would require a gold price of $32,700 per ounce. For all government debt to be backed by the world’s official central bank gold reserves would require a gold price of $56,000 per troy ounce.

While extrapolating implied prices for physical gold in a world absent of paper gold market distortions will always be estimates, if and when the fractionally-backed paper gold market does cease to function, then ownership of allocated and unencumbered physical gold will become the only way to take advantage of the potential price movements in the physical gold market.

This article originally appeared on the website BullionStar.com under the same title.

Why Wage Growth Is So Weak

The yearly growth rate of average hourly earnings in production and non-supervisory employment in the private sector eased to 2.3% in June from 2.4% in May.

Many experts are puzzled by the subdued increase in workers earnings. After all, it is held the US economy has been in an expansionary phase for quite some time now.

Softer real output growth important reason why hourly earnings remain under pressure

According to the US Government’s own data, since 2000, in terms of industrial production, the US economy has entered a subdued growth phase. (Note that between 1945 to early 2000 the industrial production index had been following a visible uptrend). Therefore, it seems the underlying ability of the economy to grow has been visibly undermined. So from this perspective the slow growth rate in output could be an important reason behind the softer wages growth rate.

Some commentators such as the vice chairman of the US Federal Reserve Stanley Fischer has suggested that slowing productivity could be an important factor behind all this.

That a fall in the productivity of workers could be an important factor is a good beginning in trying to establish what is really happening. It is however, just the identification of a symptom — it is not the cause of the problem.

Now, higher wages are possible if workers’ contribution to the generation of real wealth is expanding. The more a particular worker generates as far as real wealth is concerned the more he/she can demand in terms of wages.

An important factor that permits a worker to lift productivity is the size and the quality of the infrastructure that is available to him. With better tools and machinery, more output per hour can be generated and hence higher wages can be paid.

It is by allocating a larger slice out of a given pool of real wealth towards the build-up and enhancement of the infrastructure, that more capital goods per worker emerges (more tools and machinery per worker). This sets the platform for higher worker productivity and hence to an expansion in real wealth and thus lifts prospects for higher wages. (With better infrastructure workers can now produce more goods and services).

Capital goods formation and monetary pumping

The key factors that undermine the expansion in the capital goods per worker is an ever expanding government and loose monetary policies of the central bank. Yet many believe that both these institutions play a pivotal role in supporting the economy. According to the popular view, what drives the economy is the demand for goods and services. If, for whatever reasons, insufficient demand emerges, then it is the role of the government and the central bank to strengthen the demand to keep the economy going. Or so it is held.

There is, however, no independent category such as demand that drives an economy. Every demand must be funded by a previous production of wealth. By producing something useful to other individuals an individual can exercise a demand for other useful goods.

Any policy, which artificially boosts demand, leads to consumption that is not backed up by the previous production of wealth. For instance, monetary pumping that is supposedly aimed at lifting the economy in fact generates activities that cannot support themselves. This means that their existence is only possible by diverting real wealth from wealth generators. This in turn weakens wealth generation ability to produce wealth.

Note that monetary pumping sets a platform for various non-productive or bubble activities — instead of wealth being used to fund the expansion of a wealth generating infrastructure, the monetary pumping channels wealth towards wealth squandering activities. This means that monetary pumping leads to the squandering of real wealth. Similarly, a policy of artificially lowering interest rates in order to boost demand in fact provides support for various non-productive activities that in a free market environment would not emerge.

The origin of wealth erosion — financial deregulation

The introduction of deregulation of financial markets since early 1980’s has set the platform for massive monetary explosion out of “thin air”. The proponents for less control in financial markets hold that fewer restrictions imply a better use of scarce resources, which leads to the generation of more real wealth.

It is true that a free financial environment is an agent of wealth promotion through the efficient use of scarce real resources, whilst a controlled financial sector stifles the process of real wealth formation. However, it is overlooked by the proponents of the deregulated financial markets that the present financial system has nothing to do with a free market.

What we have at present is a financial system within the framework of the central bank, which promotes monetary inflation and the destruction of the process of real wealth generation through fractional reserve banking.

In the present system the more unrestricted the banks are the more money out of “thin air” can be generated and hence greater damage is inflicted upon the wealth generation process. This must be contrasted with genuine free banking i.e. the absence of the central bank, where the potential for the creation of money out of “thin air” is minimal.

Prior to the 1980’s financial de-regulation we had controlled banking. Banks’ conduct was guided by the central bank. Within this type of environment bank’s profit margins were nearly predetermined (the Fed imposed interest rate ceilings and controlled short term interest rates) hence the “life” of the banks was quite easy, although boring.

The introduction of financial de-regulations and the dismantling of the Glass – Steagall Act changed all that. The de-regulated environment resulted in fierce competition between banks.

The previously fixed margins were severely curtailed. This in turn called for an increase in volumes of lending in order to maintain the level of profits. In the present central banking framework this increase culminated in an explosion in the credit out of “thin air” — a massive explosion in the money supply. (In the deregulated environment, banks’ ability to amplify Fed’s pumping has enormously increased).

Note that the AMS (a measure of money supply growth) to its trend ratio (the trend was calculated from January 1959 to December 1979) hovered very closely at around 1.0 during 1959 to early 1980’s. Since early 1980’s this ratio has been rising visibly, climbing to 2.2 by October 2016 before closing at 2.1 in June 2017.

This massive explosion of money out of “thin air” has severely damaged the pool of real savings. Rather than promoting an efficient allocation of real savings, the current so-called de-regulated monetary system has been promoting the banks’ ability to channel vast amounts of money out of “thin air” across the economy.

From this, it follows that in the present banking system what is required to reduce a further weakening of the real wealth generation process and thus the erosion of workers earnings is to introduce tighter controls on banks. 

According to Murray Rothbard in Making Economic Sense,

Many free – market advocates wonder: why is it that I am champion of free markets, privatization, and deregulation everywhere else, but not in the banking system? The answer should now be clear: Banking is not a legitimate industry, providing legitimate service, so long as it continues to be a system of fractional-reserve banking: that is, the fraudulent making of contracts that it is impossible to honor.

Note that I"m not advocating here for suppressing the free market, but suppressing banks’ ability to generate credit out of “thin air.” This is only an issue because the present banking system has nothing to do with a market-based banking system.

Panic! Like It’s 1837

Via The Daily Bell

180 years ago today, everyone panicked. On May 10, 1837, New York banks finally realized that the easy money they were lending was unsustainable, and demanded payment in “specie,” or hard money like gold and silver coin. They had previously been accepting paper currency that for every $5 was backed by only $1 in silver or gold.

Things culminated to that point after years of borrowing the paper currency to expand west, buy land, and build infrastructure. As silver came in from Mexico, banks lent out five times the amount of their deposits–fractional reserve banking.

At the same time, the value of silver was falling because its supply was increasing in America. Great Britain, which had been lending much of the money, was less interested in silver because they could pay for trade with China in opium. So even though Britain had a year earlier begun demanding payment in specie, the abundant silver in America did not hold the same weight, so to speak, it had previously.

Now, reflect on this for a second. The USA was depending on loans from a country that they had successfully revolted and seceded from fewer than 50 years earlier. Britain had also provoked The War of 1812 just 25 years earlier when they wouldn’t stop attacking American ships. But somehow it still seemed like a good idea to depend on British banks to form the foundation of American development.

So at the same time when American banks had to backstep their risky practices, Britain also just so happened to need 25% less cotton, which was the foundation of the American economy. This only exacerbated the trade deficit.

But still, despite whether or not Britain’s actions were nefarious, the whole situation would have been remarkably cushioned if fractional reserve banking had not been used. Because of this “easy money,” land was bought at enormous rates on credit, but credit that was not backed by actual value–only 1/5 of the actual value existed of what was being lent!

President Andrew Jackson was not entirely without blame either. When he deconstructed the federal bank, he deposited the money into state banks, and encouraged them to go ahead and lend, lend, lend! Of course, when the time came for the banks to return the deposits, the money was gone.

So when this massive real estate bubble burst in 1837, it caused a panic and ensuing recession that lasted until 1844.

Does any of this sound familiar to you? Perhaps especially the part about government creating incentives for home loans, which could not be paid back, culminating in the crash of 2008.

Some used President Jackson’s abandonment of the Bank of the United States as proof that a central bank was needed to stabilize the economy. Yet instead of prohibiting fractional reserve banking, the Federal Reserve exacerbated the practice. They required no hard money backing of U.S. currency, while still allowing banks to lend out much more money than they possessed. Not only do banks not have enough money to cover what they lend, but the money itself is still just paper.

In the years preceding the panic of 1837, state banks had basically done the same thing. They were printing money that held value only by fiat, and funding public works projects in order to circulate the money. The obvious problem was that the money represented nothing of value, and was thus primed for rapid devaluation, which contributed to the bubbles which burst in 1837.

Now, the stock market is higher than ever, and interest rates are basically lower than ever. Easy money! What could go wrong?

Do you think another “panic” is just around the corner?

The Banking Industry Treats Its Customers Worse Than United Airlines

Authored by Simon Black via SovereignMan.com,

Last week the Internet was ablaze with disgust after a man was physically dragged off a United Airlines flight.

What’s amazing, though, is that there are countless cases of another industry abusing its customers in far, far worse ways than the airlines.

I’m talking, of course, about the banking industry.

1. Banks treat you like criminal suspects too.

Sure, United had a man dragged away like he was a rape suspect being hauled off to jail.

But banks treat their customers like criminal suspects on a daily basis.

If you think I’m exaggerating, try walking into your bank and asking to withdraw $20,000 in cash.

See how quickly they start acting like police investigators, demanding to know what you intend to do with your own savings.

Thanks to a law called the Bank Secrecy Act, banks are legally required to fill out “Suspicious Activity Reports” on their customers and send them to the government.

Banks filed nearly 1 million suspicious activity reports in 2016 alone.

Think about that; United treated one passenger like a criminal suspect. Banks treated 1 million customers like criminal suspects last year.

2. Banks nickel and dime you even more.

The airline industry is constantly being ridiculed for its incessant and ridiculous fees. Selecting a seat, checking a bag, booking over the phone, even ‘payment fees’.

My favorite is the ‘fuel surcharge,’ which most airlines imposed back in 2007-2008 to compensate for the high price of fuel after oil prices surged past $120.

Of course, when oil fell to below $30, they didn’t get rid of the fuel surcharge.

Airlines rake in tens of billions of dollars each year on these fees that absolutely infuriate their passengers.

But once again, banks are no different, endlessly nickeling and diming their customers with unnecessary fees… especially if you’re a small business owner.

Some of the most infuriating are fees for sending and receiving money.

To send a domestic wire transfer, for example, banks charge a fee of $25 to $35.

Yet the actual -cost- of banks sending each other money through the Federal Reserve system is just pennies– as low as 3 cents per transaction.

So banks are literally charging more than ONE THOUSAND TIMES as much for a wire transfer as it costs them.

3. Overbooking? Try fractional reserve banking

Last week’s United incident highlighted the common practice of overbooking, in which airlines deliberately sell more seats for a flight than actually exist.

If there are 150 seats on a plane, an airline might sell 160-165 seats on the assumption that 5% of ticketed passengers won’t show up.

In other words, they make money by selling something that doesn’t actually exist… which isn’t a problem until all the passengers show up.

Well, this happens in the banking industry as well; banks routinely make loans and charge interest on money that doesn’t actually exist.

It’s called “Fractional Reserve Banking”, a type of financial system that only requires banks to hold a tiny portion (or none) of their customers’ deposits in reserve.

If you deposit $100,000 at a bank, for example, the bank might hold 5% of that money in reserve, and loan out the remaining $95,000.

That $95,000 will eventually be deposited in the bank, upon which the bank will hold 5% of that amount ($4,750) and loan out the remaining $90,250.

This continues again and again until the bank has made $2 million in loans on a single $100,000 deposit.

The other $1.9 million doesn’t actually exist. But the bank is raking in the interest.

Just like airline overbooking, fractional reserve banking is a risky practice. And we saw in 2008 how quickly the entire system unraveled.

But that’s OK because. . .

4. Banks are in bed with the government too.

After the 9/11 attacks, the already-troubled airline industry was quickly sliding into bankruptcy, so the US government provided a $15 billion bailout through the Air Transportation Safety and Stabilization Act.

Airlines, as it turned out, were too big to fail.

Seven years later, the banks received a bailout worth more than $1.7 TRILLION, over 100x what the airlines received.

So no matter how stupid or risky their practices are, banks expect the taxpayer to bail them out.

5. Yet they brazenly screw their own customers

One of the things that was most disturbing about the United episode was how quickly the situation escalated to violence.

After overbooking the flight, United offered $800 in vouchers to passengers who voluntarily got off the plane.

$800, apparently, was the magic number. After breaching that limit they resorted to violence.

It shows a pitiful lack of respect for human dignity and a terrible violation of the public trust.

It’s the same in banking.

Hardly a month goes by without some major banking scandal– colluding on interest rates and exchange rates, manipulating asset prices, manufacturing fake accounts…

It never stops.

At least airlines pretend to compete with one another and engage in the occasional ‘fare war’.

Banks actually conspire to screw their customers.

And even when they get caught there are hardly any consequences.

One guy got dragged off a plane and the Internet lost its mind. But banks abuse their customers on a daily basis. Where’s the outrage?

If people are angry about United, they should give serious thought to their financial system.

Sadly there are no real alternatives to the airline industry.

If you need to get from Vancouver to London, you pretty much have to fly.

But with banking, there’s a whole world of solutions.

Everything from deposits to lending to exchange services can already be done better, faster, and cheaper outside of the banking system.

With options like Peer-to-Peer platforms, Blockchain services, or even physical cash and precious metals, there’s no reason to keep 100% of your savings in a system that is rigged against you.

Do you have a Plan B?

America's March To Default

Authored by MN Gordon via Acting-Man.com,

Style Over Substance

“May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”

Well, Maxine Waters is obviously right – impeaching the president is an urgent task of the utmost importance. As everybody knows, he is best friends with Vladimir Putin, the shirtless barbarian who rules the Evil Russian Empire (they were seen drinking kompromat together in Moscow, a vile Russian liquor that reportedly tastes a bit like urine. Senator McCain has the details on that story). And as Maxine Waters has just disclosed, Putin’s armies are recently advancing into Korea! We cannot let this stand, or he’ll invade Kekistan next (note that he already controls Limpopo and Gabon). Who knows where it will end?

We assume this was directed at President Trump.  But what Waters meant by this was sufficiently vague.  There was no guidance as to how President Trump should be getting ready.

Should he pack his bags?  Should he double knot his shoelaces?  Should he say a prayer? Naturally, the specifics don’t matter in the darnedest.  Rather, these days, it’s style over substance in just about everything.  This is why Waters – a committed moron – rises to the top of class in the lost republic of the early 21st century.

At the same time, the individual has been displaced by the almighty aggregate.  Economists pencil out the unemployment rate, with certain omissions, as if it represents something meaningful.  Then lunkheads like Waters repeat it as if it’s the gospel truth.

Somehow, through all of this, our representatives are oblivious to what’s really going on; that the U.S. government is just months away from a possible default.

The Dutch Experience

Last week, via our friends at Zero Hedge, we came across as article by Simon Black of Sovereign Man titled, The U.S. Government Now Has Less Cash Than Google.  Inside, Black details the invention of the government bond in 1517 Amsterdam and the long term ramifications for the Dutch government.  Here we turn to Black for edification:

“It caught on slowly.  But eventually government bonds became an extremely popular asset class.  Secondary markets developed where people who owned bonds could sell them to other investors.  Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.  In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.

“This practice caught on across the world.  International markets developed.  English investors bought French bonds.  French investors bought Dutch bonds.  Dutch investors bought American bonds.  (By 1803, Dutch investors owned a full 25 percent of U.S. federal debt.  By comparison, the Chinese own about 5.5 percent of U.S. debt today.)

“Throughout it all, debt levels kept rising.  The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable– wars, infrastructure, and ballooning deficits.  But people kept buying the bonds, convinced that the Dutch government will never default.

“Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.  It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68 percent of tax revenue just to service the debt.

“Well, in 1814 the impossible happened: the Dutch government defaulted.  And the effects were devastating.

“In their excellent book The First Modern Economy, financial historians Jan De Vries and Ad Van der Woude estimate that the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.

“That, of course, is just one example.  History is full of events that people thought were impossible.  And yet they happened.  Looking back, they always seem so obvious.”

Amsterdamsche Wisselbank, a.k.a. the Bank of Amsterdam. The bank’s history is deeply intertwined with the Dutch march toward default in 1814. When the bank was originally founded, it was rightly considered the soundest bank in Europe – it was 100% reserved and for a long time its notes were indeed “as good as gold” and were accepted in payment all over Europe. Holland’s downfall was closely tied to the decision to abuse the bank’s hard-won reputation by surreptitiously forcing it to adopt fractional reserve banking in order the fund the government (in particular, in order to fund its wars).

March to Default

Like the Dutch several hundred years ago, everyone believes it’s impossible for the U.S. government to default on its debt obligations.  U.S. Treasuries are considered the safest investment in the world.

Nonetheless, a series of events are coming down the turnpike in such rapid succession that Washington will be incapable of dealing with them.  Before Congress can say knife, irreparable damage will be done to the government’s financial standing.

No doubt, the great story of our time, that few seem to appreciate, is the increasing likelihood the U.S. government will default on its debt before the year is over.  Of course, this isn’t a certainty.  But by simply connecting a dot or two, one can construct a highly plausible scenario where this happens.

The federal debtberg. As Ludwig von Mises noted: “The long-term public and semi-public credit is a foreign and disturbing element in the structure of a market society. Its establishment was a futile attempt to go beyond the limits of human action and to create an orbit of security and eternity removed from the transitoriness and instability of earthly affairs. What an arrogant presumption to borrow and to lend money for ever and ever, to make contracts for eternity, to stipulate for all times to come!” – click to enlarge.

Presently, the national debt is over $19.8 trillion.  The $20.1 trillion debt ceiling will be reached in the second quarter.  After that, Treasury Secretary Steven Mnuchin will be forced to take extraordinary measures to avoid a default.

However, Mnuchin can only rob Peter to pay Paul for so long.  By summer’s end, Congress will have to increase the borrowing limit or suffer a default. Most likely Congress will wait until the 11th hour to take action.  They have in the past.  But this time, given its complete dysfunction, Congress may not get it done.

Yesterday, the Obamacare repeal and replace vote was pulled.  Regardless of the outcome, this highlights why Congress will be unable to raise the debt ceiling.  There’s just plain too much animosity to get it done.

Ultimately, the quickest way to reduce the size of government is to cut off its funding.  Here at the Economic Prism, where we believe in smaller government and greater individual autonomy, a U.S. government default sooner rather than later is more preferable.

Still, the march to default is a stoic trudge.  For the looming chaos to financial markets, the economy, and everything else will be unconditionally ruthless.

Le Pen Victory Would Lead To "Massive Sovereign Default", Global Financial Chaos, Economists Warn

With two months left until the French election, analysts and political experts find themselves in a quandary: on one hand, political polls show that while National Front"s Marine Le Pen will likely win the first round, she is virtually assured a loss in the runoff round against either Fillon, or more recently Macron, having between 20 and 30% of the vote; on the other, all those same analysts and political experts were dead wrong with their forecasts about both Brexit and Trump, and are desperate to avoid a trifecta as being wrong 3 out of 3 just may be result in losing one"s job.

Meanwhile, markets are taking Le Pen"s rise in the polls in stride, and French spreads over Germany are moving in lockstep with Le Pen"s rising odds. In fact, as noted earlier in the week, French debt is now the riskiest it has been relative to German in four years.

Why are markets spooked? 

As per her recently released manifesto, Le Pen has promised to unilaterally take France out of the Euro within six months, sparking concerns over what might happen then. The answer comes from the National Front itself, which overnight revealed its plans to the FT, suggesting that €1.7 trillion of French public debt would be redenominated into francs if the far-right National Front party gets into power.

Call it Yanis Varoufakis" dream scenario.

As the FT reports, "in comments that are likely to amplify fears about the impact of a FN victory on the global financial system, several senior-ranking party members have told the Financial Times that in  power the far-right would seek to redenominate about 80 per cent of the France’s €2.1tn public debt — the part that was issued under French law — in a new national currency. Confirming that Le Pen"s party had extensively studied the topic, David Rachline, FN’s head of strategy, said in an interview that only about 20% of France’s total public debt “falls under international law [and would stay denominated in euros] . . . but for the rest we will have the right to change the currency”.

So with the green line in the chart above continuing to rise, a potential currency redenomination and "Frexit" on the table, and with memories of "impossible" events like Brexit and Trump quite fresh in everyone"s memory, the time has come to bring out the big scaremongering guns, starting with the rating agencies, and sure enough they did not disappoint, because as quoted by the FT, an event envisioned by Le Pen would, according to rating agencies, be likely to amount to the largest sovereign default on record, nearly 10 times larger than the €200bn Greek debt restructuring in 2012, threatening chaos to the world financial system on top of the collapse of the single currency.

Moritz Kraemer, S&P’s head of sovereign ratings, said in a statement that this would be a default. “There is no ambiguity here . . . If an issuer does not adhere to the contractual obligations to its creditors, including payment in the currency stipulated, [we] would declare a default.”

Alastair Wilson, head of sovereign ratings at Moody’s, said they would consider any country leaving the euro to be in default if changing the currency of its debt caused investors to lose out financially relative to the original promise. “The test for us is: do we think investors will be able to get back the value they put in, when they expected to get it back,” he said.

The FN"s Rachline said French debt would be redenominated on a “one franc to one euro” basis. But he added that reintroducing a national currency that could fall in value against the rump euro would lower France’s total debt burden. “[Having our own currency] will allow us to do a competitive devaluation,” he said.

Again, this was precisely the scenario contemplated by Vaourfakis, until he realized that the ECB has full control over the Greek banking system and the population"s euro-denominated deposits: there simply was not enough cash for the Greek people if everyone decided to withdraw funds, which is what ultimately killed the Varoufakis revolution.  And to think that fractional reserve banking would have been understood by now.

It is unclear if Le Pen, or the FN, has planned for this contingency yet: it would be silly not too less than two years after the Greek 2015 fiasco. Nonetheless, the process is distinctly possible. Lawyers contacted by the FT said the currency redenomination for the bonds governed by French law would be theoretically possible because any nation can change its own laws. This means that bondholders would struggle to pursue France in the courts in the same way they pursued Argentina after its default in 2001.

Matthew Hartley, a debt capital markets partner at Allen & Overy, said: “Because the bonds are governed by French law, they just have to change French law to change the terms of the bonds.”

Meanwhile, just in case rating agencies were not sufficiently convincing, mainstream economists - because their reputation is obviously much higher - also chimed in, arguing that France leaving the euro would cause chaos in Europe. Benoît Cœuré, executive board member at the European Central Bank, this week said that leaving the euro would lead to “impoverishment”, higher interest rates, a heavier debt burden, unemployment and inflation.

The European Central Banker will likely be even more angry when he learned that Le Pen plans on doing what the Developed World"s central bank would love to do, but are - for the time being - stopped: deploy helicopter money. The FN has said that, following a shift back to the French franc, rules governing the country’s central bank would be changed to allow it to directly finance the French state, for example servicing French welfare payments and government debts.

Leaving the euro is just one pillar of the FN’s economic strategy, which is focused on making French industry more competitive, taking a page right out of the Trump playbook. However, since France does not share the US" exorbitant privilege of the global"s reserve currency and world"s strongest army, France - unable to bully its trading partners, hopes that a fall in the value of the new national currency will boost exports.

The second thrust of the party’s economic policy is to use “intelligent protectionism” to allow them to defend French industries — something that they are currently prevented from doing by EU rules, says the FN.

One senior official said it was a return to the politics of postwar head of state Charles de Gaulle, who kept a tight hand on the French economy. “We are not extreme, we are Gaullists,” said the person, who did not want to be named.

This dirigiste strategy would see them imposing trade barriers on any “unfair competition” from abroad, according to party officials. There would also be a 3 per cent import tax on foreign goods that would be given as tax breaks to the poorest.

For now, it is unclear whether Le Pen will win or not: there are two more months to go, and even with her rise in the polls against scandal-ridden opponents, one can debate if she has enough support to win. But no matter the outcome, Mikael Sala, the head of Croissance Bleu Marine, a think-tank supporting the FN, summarized it perfectly when he shrugged off concerns that the redenomination of the currency would be considered a default by the rating agencies. “We will be elected by the French people — it is not our job to please [the rating agency] S&P,” he said. “They do not have much credibility after the financial crisis anyway.”

Will Donald Trump Reverse The War On Cash?

Submitted by Nick Giambruno via InternationalMan.com,

I recently sat down with my friend Jason Burack from Wall St for Main St.

Jason and I had an in-depth discussion on the decline of globalism, the War on Cash, and more.

I think you’ll enjoy our conversation.

*  *  *

Jason Burack: It seems that globalism may be on the retreat. What’s your opinion about that, in light of Brexit, Donald Trump winning, and the Italian referendum failing?

Nick Giambruno: I think you’re right, Jason. Right now globalism is on the decline. But let’s define “globalism” before I explain why. This word gets thrown around a lot. But most people don’t really know what it means.

It’s very simple. Globalism is the centralization of power into a couple of global institutions: the EU, the United Nations, the IMF, the World Bank, NAFTA, NATO, and so on. It’s really just a polite way of describing world government, or what George H.W. Bush termed the New World Order.

I think globalism and the centralization of power is always a bad thing. People who value individual freedom and economic freedom… really, freedom in general, should oppose it.

It’s an interesting moment in history. Those three things you just mentioned—Brexit, Trump, and the failure of the Italian referendum—are clear signs that globalism is losing steam.

Whether it’s a sort of one step back, two steps forward thing or the ideology of globalism is really on its way out remains to be seen.

Jason: Look at what’s going on with Brexit. The elites in London and Brussels are still fighting it. You had your boots on the ground in Italy. How angry were the people you talked to there about the referendum? Are they actually serious about leaving the EU?

Nick Giambruno: Well, here’s the thing. Most Italians didn’t know what the referendum was about. They just knew a “Yes” vote was a vote of confidence in Matteo Renzi’s pro-EU, pro-globalist government.

In short, the referendum was about taking power away from Italy’s regional and city governments and concentrating it more in the country’s central government. So it was worth opposing on that basis alone.

Most Italians didn’t understand the complex and arcane constitutional changes written into the referendum. So it took on a life of its own when Matteo Renzi promised to resign if it failed. That’s a vote everyone can understand.

When Renzi made that promise, he thought it was a safe bet. It’s similar to what happened to David Cameron with the Brexit vote.

But after I spent a few weeks in Italy—I’m also an Italian citizen—it was clear the referendum was no slam dunk. That’s why I predicted it would fail, and that Renzi would resign, months in advance.

Jason: So, what happens next, now that Renzi’s government has collapsed?

Nick Giambruno: There’s a rising populist party in Italy called the Five Star Movement. It’s actually led by a comedian. The party basically started out as a joke a few years ago.

Italians are so frustrated with so-called “mainstream” political parties that they’ve deserted them en masse for the Five Star Movement and other anti-establishment populist parties like the Lega Nord. The Five Star Movement is basically leading the polls as the most popular party in Italy.

All of Italy’s populist parties want a referendum on ditching the euro for Italy’s old currency, the lira. I think it would pass.

Italy hasn’t had any real economic growth since it joined the euro in 1999. That’s pretty profound. The Italian economy is in the same place it was 17 years ago. A lot of that is because the euro makes Italy uncompetitive with countries like Germany.

The next Italian government could be a coalition of anti-EU populist parties. If that happens, there’s an excellent chance Italy could leave the euro.

Keep in mind that Italy is a core member of the euro. If it leaves, France would probably leave, too. And if that happens, the euro is finished.

Jason: Without the euro, what’s left holding the EU together?

Nick Giambruno: Almost nothing. The euro is the main glue. Without it, the whole EU could unravel.

We’re still early in the process. But it doesn’t look good for the globalists and the Eurocrats. I think historians will look back at the failure of the December 4 Italian referendum as a crucial tipping point.

With globalism failing, I’m not sure what happens next. No one does.

We could see a rise of nationalism, which wouldn’t be a good thing. Or political power could diffuse even further, which would be a better outcome. Decentralization is good for individual and economic freedom.

So, instead of a rise of nationalism—which would strengthen the existing nation-states—European countries could split apart. Italy, for example, has only been a “country” since the mid-1800s. There are a number of serious secessionist movements in Italy and other European countries. I think there’s a very good chance some European nation-states will break apart—not just in our lifetimes, but in the intermediate future.

Jason: If Italy returns to the Italian lira, do you think it would prevent bailouts of the troubled Italian banks?

Nick Giambruno: The Italian banking system is a mile-high house of cards that’s getting wobblier by the day. As I mentioned, the Italian economy has stagnated for years. It hasn’t really grown since it joined the euro. This has translated into big problems for Italy’s banking system.

Italian banks have made hundreds of billions of dollars’ worth of loans to Italian individuals and businesses—loans that have soured along with the economy. They’re like an insatiable black hole that’s swallowing all the capital in Italy’s banking system.

Returning to the lira wouldn’t herald an era of sound economics. It just means the Italian government could recapitalize the banking system by turning on the printing press. It can’t do that with the euro.

On a somewhat related note, this example relates to the seemingly eternal inflation/deflation debate. I think it shows that ultimately, in a fiat money system where the government can create as many new currency units as it wants, deflation will always lose out to inflation.

Things are very different than they were in the 1930s. Back then, the last remnants of the gold standard meant most governments couldn’t print money to bail out failing banks. This limited their ability to create new currency units. Of course, that’s not the case today.

It’s completely predictable what any government with its back against the wall will do. They always choose the easy option, the option that preserves their own power… money printing on a massive scale.

That’s why inflation always wins out in the end.

Jason: That brings me to my next point. It seems like the elites are really pushing for a cashless society. Do you think Donald Trump is able to or would even want to stop this?

Nick Giambruno: I think the War on Cash is directly related to the world’s unsound banking systems. Thanks to the magic—or more accurately, institutionalized fraud—of fractional reserve banking, most banks only keep a small fraction of their depositors’ money on hand. It’s a very unstable, shaky situation.

One of the biggest mistakes the average person makes is thinking the money he puts in his bank account is his. It’s not.

Once you deposit money in the bank, it’s no longer your property. It belongs to the bank. What you own is a promise from the bank to repay you. Technically, you’re an unsecured creditor. That means you’re on the bottom of the totem pole if the bank goes bust. And you’re very likely to get burned if the bank gets in trouble.

Money in a bank is a very different beast than cash stuffed under your mattress. Yet 99.9% of people conflate the two.

Many people think the FDIC or some government safety net will rescue them if and when their bank fails. But the FDIC has only a couple of pennies for every dollar it supposedly insures. It wouldn’t take much to wipe out all of their reserves. So it’s really a false sense of security.

The average person is not even dimly aware of the enormous risks inherent in the banking system.

Jason: How does this all relate to the War on Cash?

Nick Giambruno: The War on Cash is a prop. It forces people out of cash and into banks. So it’s no surprise the war is ramping up as banking systems deteriorate.

Then you have what Nassim Taleb would call the “Intellectual Yet Idiot” from Harvard—people like Ken Rogoff and Larry Summers who’ve made a cashless society their mission. And it all starts with eliminating the $100 bill.

These people get prominent space in the mainstream financial media. They create an echo chamber of calls for a cashless society. It’s creepy and totalitarian. I mean, what kind of a person wakes up in the morning wanting to do things that would extinguish many of our remaining liberties?

Privacy is a fundamental human right. It"s necessary to protect human dignity, which is essential to a free society. But unfortunately, a lot of people have forgotten that.

Also, in a cashless society, the government can concoct an unlimited number of new ways to confiscate your wealth.

The War on Cash is a mortal threat to individual and economic liberty. I think its advocates are clearly sociopaths and enemies of the common man. Unfortunately, I don’t see the war slowing down. I see it heating up.

Just look at what happened in India recently. On the day of the US election—when the whole world was distracted—the Indian government ambushed its citizens. Instantly, and without warning, it declared certain high-value currency notes invalid.

They said, “Oh, well, tax evaders, drug dealers, and terrorists use cash so we have to get rid of it or make it harder to use.”

It’s completely ridiculous. Anybody who can think critically and independently can see right through this. It’s simply a clumsily executed power grab. It’s done nothing but create chaos and harm the Indian economy.

Yet, when I read about it in the mainstream financial media, I often come across articles praising the Indian government for its bold reforms. It’s quite strange, like we’re living in a bizarro world.

Instead of resisting, the Indian people sheepishly accepted their government’s blatant power grab. This will likely embolden other governments… and the Intellectual Yet Idiot class, of course.

It means we should expect the War on Cash to accelerate in 2017. I haven’t seen any evidence suggesting Trump would reverse any of this.

When The Rich Become Preppers, It's Time To Worry

For over 10 years now, we"ve been openly advocating that folks take action to become more prepared should crisis arrive. And for a long time, this advice relegated us to being labeled "tin-foil hat doomsday preppers" (and other less-polite monikers). The media just couldn"t figure out any other box to put us in.

But now, the concept of taking at least some responsibility for your own future well-being by increasing your self-reliance is finally moving towards the mainstream.

Of course, government agencies have long ascribed to "situational planning" in case sudden unrest were to happen. Nations around the world have long invested in redundant supply chains, as well as well-stocked disaster "continuity caves", fortresses and hardened facilities of all sorts.

It"s strikes us as puzzling that most private citizens fully expect their government to be prepared for disaster like this, yet don"t see similar wisdom in practicing a similar approach to preparation in their own life. In fact, many go so far as to denigrate and even mock their friends and neighbors who do.

Perhaps that gap between what"s considered acceptable in a public institution but not in a private home is best explained as abdication of personal responsibility. It happens a lot in our society. Live your life and let the government worry about the scary stuff. They"ll take care of us if something bad happens.

We think it"s a huge error in judgment (remember Katrina, anyone?), but we understand why it"s a convenient and comforting narrative to hold. Plus, it frees up a lot more time to shop at the big box stores and keep up on the Kardashians. Life"s more fun and stress-free...right up until some unexpected disruption occurs.

Well, we here at Peak Prosperity deeply believe in shouldering our own personal responsibility. And not just to protect our own private well-being, but also that of the communities we live in and depend on.

After all, Peak Prosperity"s mission is To create a world worth inheriting. You don"t do that simply waiting to see if the calvary is ever going to show up. You assume responsibility for your own destiny, and inspire others to do the same by offering your support and serving as a living model for others to emulate.

Those expecting/demanding the State to have high emergency preparedness while not practicing the same in their own lives lack integrity. Nobody respects a low-integrity person for very long. (Pro tip:  Don’t fly your personal jet to give a lecture on the importance of addressing climate change.)

A resilient nation is built from the bottom up, starting with resilient households. Enough of those households creates resilient neighborhoods, and those in turn lead to resilient towns and cities. And then counties, and states -- you get the point.

So taking steps to be partially self-sufficient in the basics of life – food, warmth, shelter and water – and have useful experience or skills (medicine, fixing things, building, distilling, to name just a few) just makes sense. You don"t have to strive to be completely self-reliant -- it"s not realistic or necessary. Just position yourself to reduce your lifestyle requirements during times of strife, and to contribute valued support to those whom in turn you ask for help.

Preparing Is Rapidly Going Mainstream

For years now, I’ve written that the highly wealthy people whom I encounter through conferences, family offices and private consultations all got the “bug out” vibe after the 2008 crash, if not before. Today, many of them are more thoroughly prepped than us regular folks can imagine.

Disaster prepping is now acceptable enough that this week"s article in The New Yorker had no trouble finding high-profile executives to talk to on record. I couldn"t help noticing that the reporter avoided inferring that these folks were crazy, or implying as much. I guess once a critical mass of super wealthy tech entrepreneurs jumps on the bandwagon it’s suddenly hip to be a prepper?

At any rate, if you haven"t already seen the article, it"s a real eye-opener:

Doomsday Prep For The Super-Rich

Jan 30, 2017

Steve Huffman, the thirty-three-year-old co-founder and C.E.O. of Reddit, which is valued at six hundred million dollars, was nearsighted until November, 2015, when he arranged to have laser eye surgery. He underwent the procedure not for the sake of convenience or appearance but, rather, for a reason he doesn’t usually talk much about: he hopes that it will improve his odds of surviving a disaster, whether natural or man-made. “If the world ends—and not even if the world ends, but if we have trouble—getting contacts or glasses is going to be a huge pain in the ass,” he told me recently. “Without them, I’m fucked.”

Huffman, who lives in San Francisco, has large blue eyes, thick, sandy hair, and an air of restless curiosity; at the University of Virginia, he was a competitive ballroom dancer, who hacked his roommate’s Web site as a prank. He is less focused on a specific threat—a quake on the San Andreas, a pandemic, a dirty bomb—than he is on the aftermath, “the temporary collapse of our government and structures,” as he puts it. “I own a couple of motorcycles. I have a bunch of guns and ammo. Food. I figure that, with that, I can hole up in my house for some amount of time.”

Survivalism, the practice of preparing for a crackup of civilization, tends to evoke a certain picture: the woodsman in the tinfoil hat, the hysteric with the hoard of beans, the religious doomsayer. But in recent years survivalism has expanded to more affluent quarters, taking root in Silicon Valley and New York City, among technology executives, hedge-fund managers, and others in their economic cohort.

Last spring, as the Presidential campaign exposed increasingly toxic divisions in America, Antonio García Martínez, a forty-year-old former Facebook product manager living in San Francisco, bought five wooded acres on an island in the Pacific Northwest and brought in generators, solar panels, and thousands of rounds of ammunition. “When society loses a healthy founding myth, it descends into chaos,” he told me. The author of “Chaos Monkeys,” an acerbic Silicon Valley memoir, García Martínez wanted a refuge that would be far from cities but not entirely isolated. “All these dudes think that one guy alone could somehow withstand the roving mob,” he said. “No, you’re going to need to form a local militia. You just need so many things to actually ride out the apocalypse.”

Once he started telling peers in the Bay Area about his “little island project,” they came “out of the woodwork” to describe their own preparations, he said. “I think people who are particularly attuned to the levers by which society actually works understand that we are skating on really thin cultural ice right now.”

In private Facebook groups, wealthy survivalists swap tips on gas masks, bunkers, and locations safe from the effects of climate change. One member, the head of an investment firm, told me, “I keep a helicopter gassed up all the time, and I have an underground bunker with an air-filtration system.” He said that his preparations probably put him at the “extreme” end among his peers. But he added, “A lot of my friends do the guns and the motorcycles and the gold coins. That’s not too rare anymore.”

Tim Chang, a forty-four-year-old managing director at Mayfield Fund, a venture-capital firm, told me, “There’s a bunch of us in the Valley. We meet up and have these financial-hacking dinners and talk about backup plans people are doing. It runs the gamut from a lot of people stocking up on Bitcoin and cryptocurrency, to figuring out how to get second passports if they need it, to having vacation homes in other countries that could be escape havens.” He said, “I’ll be candid: I’m stockpiling now on real estate to generate passive income but also to have havens to go to.” He and his wife, who is in technology, keep a set of bags packed for themselves and their four-year-old daughter. He told me, “I kind of have this terror scenario: ‘Oh, my God, if there is a civil war or a giant earthquake that cleaves off part of California, we want to be ready.’ ”

(Source)

The message here is clear enough: The wealthy have caught onto the idea that the probability of a major social disruption is high enough to merit serious action.

Prepping is now becoming “a thing.”

And that makes it increasingly OK to talk about in the open. That"s a great development; we at Peak Prosperity have been waiting for this milestone for a decade now. But it comes with a cost: the more people who awaken to the risks we face, the faster the peaceful complacency society has slumbered in will dissipate.

From here it’s only a hop, skip and a jump for the newly-awake to start losing faith in our debt-based fiat money system and the massive unsustainability of the economy built on top of it.  As our readers know very well, once you understand how these systems are structured, it"s hard not be shocked by their fragility (not to mention their deep unfairness). 

For example, our food distribution system relies on a lot of moving, integrated parts.  If any one of these breaks down, the shipment of food (and pharmaceuticals, and many other components of daily life) simply stops. Cities only have about 3 days" worth of inventory at any given time.  Should a shock occur to the system, even a minor one like a winter blizzard, supply can dwindle out in a matter of hours as people scramble to get what they can.

Here’s an image of shelves at a Wal-Mart in Charlotte NC taken as a relatively minor snow storm was approaching the area on January 6^th 2017.

(Source)

The line between “well stocked” and “stripped bare” is merely a matter of public awareness.  Once people become worried about the possibility of scarcity, their mad scramble to hoard what they can  actually creates the very scarcity they dear. That"s because our system is deliberately run on a just-in-time basis, in order to maximize profit. Excess inventory incurs storage fees; so we "optimize" our supply chains to avoid it. But it begs the question: perhaps the human suffering costs of quickly running out of essentials during an emergency is higher than the dollars saved by keeping inventory levels minimal?

Our fractional reserve banking is structured the same way: it only works if everyone doesn’t show up at the same time demanding to withdraw their money.  If that ever happens, there isn"t nearly enough supply for everyone. Once the illusion is exposed, then people get panicky and start grouping into angy mobs

Think it can"t happen here? Just talk to folks in India. Two months ago they would have agreed with you. Today, the most they are allowed to withdraw for their bank is a few hundred dollars worth of banknotes per week. Here"s a video of a run on a bank there where the swaming masses quickly stampede over the security guards, trampling elderly patrons in the process:

And it"s even worse in Venezuela. There, the limit is US$5 per day. If you had US10,000 of savings in the bank, at that rate, it would take you 5 and half years to withdraw it all.

Playing the Odds

Of course, most truly catastrophic events are quite rare. Rather than worry about them, it usually makes sense to simply ignore these tail risks and carry on with your life.

I do this rather than stress out about a large asteroid impact or a Yellowstone supervolcano eruption. While either of these *could* happen in my lifetime, the odds are incredibly low and there’s virtually nothing I can do to prepare for or predict such an event. So I don’t even try.

Other potential threats to our well-being, however, have much higher probabilities. And yet, most people are quite content to ignore the need to prepare, no matter how high the risks. Few people maintain a deep pantry, which is why the store shelves invariably get stripped as a big storm rolls into town. And only a small minority of people living along California"s active fault lines have put together a well-stock earthquake kit.

But more cadres of thinkers are embracing the wisdom of investing in an ounce of prevention today. In the New Yorker article, the techies from Silicon Valley seem more inclined to ‘do the math’ and follow logic:

Yishan Wong, an early Facebook employee, was the C.E.O. of Reddit from 2012 to 2014. He, too, had eye surgery for survival purposes, eliminating his dependence, as he put it, “on a nonsustainable external aid for perfect vision.” In an e-mail, Wong told me, “Most people just assume improbable events don’t happen, but technical people tend to view risk very mathematically.”

He continued, “The tech preppers do not necessarily think a collapse is likely. They consider it a remote event, but one with a very severe downside, so, given how much money they have, spending a fraction of their net worth to hedge against this . . . is a logical thing to do.”

As we"ve advised for years, even if something has a low probability, if it"s result would be catastrophic, then buy insurance if you can. Prepping for a major "grid-down" power outage is simply a no-brainer for those who have decent math skills. The calculation is eminently rational, as there a number of potential causal factors (weather, sabotage, squirrel) and the downside could be quite large.

So, with all the potential looming risks out there -- economic shock, social disorder, supply chain failure, to name just a few -- what are practical, affordable, achievable steps a prudent person should take?

In Part 2: Preparing Prudently, we present a specific list of the most useful preparations, along with links to helpful resources and services for carrying them out. Nearly anyone can implement these, and nearly everyone should. The more of us who prepare wisely today, the more of us who will be in a position to be of service when the next crisis arrives.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

42 Years of Fractional Reserve Alchemy

Hold your real assets outside of the banking system in one of many private international facilities  -->    https://www.sprottmoney.com/intlstorage 

Posted with permission and written by Craig Hemke (CLICK HERE FOR ORIGINAL)

It has now been 42 years since The Global Bankers successfully alchemized gold through the advent of futures trading, so we begin the new year by looking back at how we got into this position in the first place.

 

To that end, let"s start 2017 by going back to 1974.

 

Over the past few years, you"ve often heard me reference the HISTORY and FACT of gold price suppression and manipulation. Whenever it comes up in an interview or presentation, it often goes like this:

 

• After Bretton Woods, the US tried to go it alone in managing the price of gold to $35/ounce. By the late 1950s, this caused a mini-crisis when US gold reserves fell by a third as countries around the world exchanged their dollars for gold. There were hearings on Capitol Hill and decisions were made to change the way that $35 gold would be managed.


• This led to the formation of The London Gold Pool in 1961. No longer would the US go it alone in providing physical metal at the $35/ounce price. Seven other countries were recruited to the effort in order to lessen the burden and drawdown of US reserves. This effort to manage the $35 price worked for nearly seven years until global gold demand finally overwhelmed the Gold Pool and the effort collapsed in 1968.


• The US was suddenly on its own again and demand for gold in exchange for dollars soon grew to such an extreme that President Nixon was forced to cancel the dollar"s convertibility into gold on August 15, 1971. This is the "closing of the gold window" that you"ve heard so much about.

 

A new movement to allow private gold ownership in the US soon began...recall that FDR had outlawed private gold ownership in 1933...and on January 1, 1975, US citizens were finally allowed to once again own and hold physical gold.

 

But something very important happened the day before, on December 31, 1974. On that date, the Commodity Exchange Inc., also known as The Comex, began trading gold futures contracts and, as you"ll see below, it was through these gold derivative contracts that the global bankers and governments finally perfected alchemy...a pursuit which had foiled and baffled scientists for centuries.

 

You may recall that a few years back, Wikileaks unveiled a whole assortment of previously-classified US government cables and transmissions. Wikileaks documented them all together and posted them to their website under the category of "Public Library of US Diplomacy". From the site, please read through this cable from December 10, 1974:

 

 

The entire document lays bare the intention behind the manufacture of gold derivatives to replace physical metal. However, in case you missed it, here"s the key paragraph:

 

 

And there you have it. Laid bare for all to see. The "Dealers" expectations" of 1974 are manifest in 2017. The futures market is "of significant proportion" and physical trading is "miniscule by comparison". Price suppression, manipulation and volatility has "negated long-term hoarding" of gold by US citizens and very few even consider gold as money at all with the vast majority seeing it only as a commodity or a "hedge".

 

However, the fraud of the Banker"s alchemy will one day come to an end as confidence in fiat currency collapses and physical demand for real money overwhelms this fractional reserve system. Will/can this occur in 2017? It"s certainly possible as negative interest rates and currency devaluations lead to all sorts of unexpected consequences. But the timing hardly matters when the end result is a foregone conclusion. No system built upon a foundation of deceit and fraud can stand the test of time, and the Banker"s fractional reserve alchemy is no different. It will one day collapse. Of that you can be certain.

 

(A major h/t to James Henry Anderson for reposting the Wikileak page to Twitter on January 1.)

 

 

Please email with any questions about this article or precious metals HERE

Posted with permission and written by Craig Hemke (CLICK HERE FOR ORIGINAL)

Don’t Sweat The Election. The Next Crisis Is Already Baked Into The Cake

Submitted by John Rubino via DollarCollapse.com,

Friday was one of those days where you walk away from the screen for a minute and come back to find a completely different market. All it took was the FBI finding a trove of new Clinton emails, thus breathing new life into the Trump campaign and throwing what was a foregone conclusion back into doubt. Stocks tanked and gold popped, illustrating Wall Street’s preference in the upcoming election.

It will be this way until the vote, especially if polls continue to tighten and the outcome remains uncertain. So there’s no point in obsessing over fundamentals for now. Nothing real will matter until we find out who gets to mess things up going forward. Sort of like the original Ghost Busters where the demon/god says “Choose the form of the destructor.”

In other words it’s a mess either way. Only the details of the mess are in question.

From here on out politics are only relevant at the extremes - major war, corruption scandal, martial law etc. Short of that, the fiat currency/fractional reserve banking world has such institutional momentum that it really won’t matter whether Trump is picking on bankers and building his wall or Clinton is protecting Wall Street and raising taxes. Debt will keep soaring as it has under every president since Reagan and jobs will disappear as machines replace people, thus bringing the end of the current system inexorably closer.

So it’s both dangerous to try to time this kind of uncertainty and, in the end, unnecessary. Crisis is coming and governments (whether left or right, populist or establishment) will respond as they always do, with easier money and more borrowing.

Here are three trends that matter vastly more than the name of the next US president:

(Talk Markets) – While concerns about China’s debt load, capital flows, and depreciating currency have been pushed to the back-burner in recent months, perhaps facilitated by a welcome rebound in global inflation – perceived by markets and global central bankers that monetary policy is finally working – it is worth a quick reminder of how we got here.

First, a quick trip through memory lane to remind us how much has changed in just the past year.

In a note by Morgan Stanley’s Chetan Ahya released on Sunday, the strategist reminds us that a little more than a year ago, the global economy was facing intense disinflationary pressures. Global commodity prices were declining significantly and the slowdown in China and other major commodity-producing EMs had led to some concerns that it could pull developed markets into recession and drag inflation down along with it. At the same time, in China, producer prices fell by almost 6%Y and the regime change in its currency management approach meant that China was no longer absorbing disinflationary pressures from abroad.

And while this seems like a distant memory today, thanks to China which has played a pivotal role in driving the global inflation cycle – this time on the upside – as the cyclical recovery has both lifted China’s own inflation and transmitted it globally, here is how this happened: the recovery in China has been driven by yet another round of debt indulgence. Debt in China has grown by US$4.5 trillion over the past 12 months, by far the highest amount of debt creation globally as compared to US$2.2 trillion in the US, US$870 billion in Japan and US$550 billion in the euro area. Indeed, China on its own has added more debt than the US, Japan and the euro area combined.

While we have shown the IIF’s forecast of Chinese debt countless times in recent months, here it is once again to put China’s unprecedented debt expansion in context:

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(Telegraph UK) – Surging rates on dollar Libor contracts are rapidly tightening conditions across large parts of the global economy, incubating stress in the credit markets and ultimately threatening overvalued bourses.

Three-month Libor rates – the benchmark cost of short-term borrowing for the international system – have tripled this year to 0.88pc as inflation worries mount.

Fear that the US Federal Reserve may have to raise rates uncomfortably fast is leading to an increasingly acute dollar shortage, draining global liquidity.

“The Libor rate is one of the few instruments left that still moves freely and is priced by market forces. It is effectively telling us that that the Fed is already two hikes behind the curve,” said Steen Jakobsen from Saxo Bank.

“This is highly significant and is our number one concern. Our allocation model is now 100pc in cash. This is a warning signal for the market and it happens extremely rarely,” he said.

Goldman Sachs estimates that up to 30pc of all business loans in the US are priced off libor contracts, as well as 20pc of mortgages and most student loans. It is the anchor for a host of exotic markets, used as a floor for 90pc of the $900bn pool of the leveraged loan market. It underpins the derivatives nexus.

The chain-reaction from the Libor spike is global. The Bank for International Settlements warns that the rising cost of borrowing in dollar markets is transmitted almost instantly through the global credit system. “Changes in the short-term policy rate are promptly reflected in the cost of $5 trillion in US dollar bank loans,” it said.

Roughly 60pc of the global economy is linked to the dollar through fixed currency pegs or ‘dirty floats’ but studies by the BIS suggest that borrowing costs in domestic currencies across Asia, Latin America, the Middle East, and Africa, move in sympathy with dollar costs, regardless of whether the exchange rate is fixed.

Short-term ‘Shibor’ rates in China have been ratcheting up. The cost of one-year swaps jumped to 2.71pc last week, and the spread over one-year sovereign debt is back to levels seen during the Shanghai stock market crash last year.

These strains are not a pure import from the US. The Chinese authorities themselves are taking action to rein in a credit bubble. It is happening in parallel with Fed tightening, each reinforcing the other, and that makes it more potent.

Three-month interbank rates in Saudi Arabia have soared to 2.4pc. This is the highest since the global financial crisis in early 2009 and implies a credit crunch in the Saudi banking system. The M1 money supply has fallen 9pc over the last year.

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(Economic Collapse Blog) – Do you remember the subprime mortgage meltdown from the last financial crisis? Well, this time around we are facing a subprime auto loan meltdown. In recent years, auto lenders have become more and more aggressive, and they have been increasingly willing to lend money to people that should not be borrowing money to buy a new vehicle under any circumstances. Just like with subprime mortgages, this strategy seemed to pay off at first, but now economic reality is beginning to be felt in a major way.

The total balance of all outstanding auto loans reached $1.027 trillion between April 1 and June 30, the second consecutive quarter that it surpassed the $1-trillion mark, reports Experian Automotive.

The average size of an auto loan is also at a record high. At $29,880, it is now just a shade under $30,000.

In order to try to help people afford the payments, auto lenders are now stretching loans out for six or even seven years. At this point it is almost like getting a mortgage.

But even with those stretched out loans, the average monthly auto loan payment is now up to a record 499 dollars.

Already, auto loan delinquencies are rising to very frightening levels. In July, 60 day subprime loan delinquencies were up 13 percent on a month-over-month basis and were up 17 percent compared to the same month last year.

Prime delinquencies were up 12 percent on a month-over-month basis and were up 21 percent compared to the same month last year.

In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 millionfor credit losses, a 34% increase from the first half of 2015.

General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.

These three things – soaring Chinese debt, disruptions in the money market, and the end of the auto loan bubble – matter vastly more than which party runs what part of the government.

When one or all (or some other problem like Deutsche Bank) blow up in 2017, deficit spending will soar, interest rates will be forced down (to the extent that that’s possible) and new rules will be imposed on whatever freely-functioning markets remain.

And so it will go until the old tricks stop working. Then the details will start to matter again.